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Fitch affirms Regal Entertainment issuer default rating

February 05, 2013|Reuters

Feb 5 - Fitch Ratings has affirmed the 'B+' Issuer Default Rating (IDR) ofRegal Entertainment Group (Regal) and Regal Cinemas Corporation (RegalCinemas). The Outlook is Stable. Please see a full list of ratings at the end of the release.

--Box office revenue grew solidly in 2012 (+6.5% according to Box Office Mojo) driven mostly by attendance growth. The 2012 film slate was highlighted by The Avengers, The Dark Knight Rises, The Hunger Games, Skyfall, The Hobbit, and the Twilight Saga.

--Fitch recognizes that theater attendance is inherently volatile due to the quality of the film slate in any given year. The 2013 slate is promising with many sequels including, The Hunger Games: Catching Fire, Iron Man 3, Star Trek Into Darkness, The Hobbit: The Desolation of Smaug, and Thor: The Dark World. However, due to the strong 2012 performance, which will be a challenge to match,Fitch's current base case for 2013 is for attendance to decline in the low single digits.

--For the long term, Fitch continues to expect that the movie exhibitor industrywill be challenged in growing attendance and any potential attendance declines will offset some of the growth in average ticket prices. The ratings factor in the intermediate/long-term risks associated with increased competition from at-home entertainment media, limited control over revenue trends, the pressure on film distribution windows, and increasing indirect competition from other distribution channels (such as VOD and other OTT services). Regal and its peers rely on the quality, quantity, and timing of movie product, all factors out of management's control.

--Fitch does not anticipate a significant decline in concession revenue per patron, but remains cautious that high-margin concessions (which represent 26% of Regal's total revenues and carry 87% gross margins), may be vulnerable to reduced per-guest concession spending due to economic cyclical factors or a re-acceleration of commodity prices. A slight deterioration in concession marginis factored into the current rating. While Fitch expects increased concession spend per guest, margins are expected to contract due to the lower margin premium menu offerings introduced by Regal and other theater circuits.

--Fitch weighs the prospective challenges facing Regal and its industry peers inarriving at the long-term credit ratings heavily . Significant improvements in the operating environment (e.g. sustainable increases in attendance) and sustained deleveraging could have a positive effect on the rating, though Fitch views this as unlikely.

--Fitch anticipates that Regal, and other movie exhibitors, will continue to consolidate. While not anticipated, a material debt-funded acquisition or returnof capital to shareholders that would raise the unadjusted gross leverage beyond4.5x could have a negative impact on the rating.

As of Sept. 27, 2012, liquidity consisted of $253 million in cash and $82 million of availability under Regal Cinemas' $85 million revolving credit facility due May 2015. There are no significant maturities until 2017 when the term loan facility comes due.

Fitch-calculated FCF for latest 12 months ended September 2012 was $136 million.Fitch expects 2012 FCF to be negative $50 million. Fitch's FCF calculation deducts both the $155 million special dividend and Regal's regular dividend. In 2013, including its regular dividend payment, Fitch expects FCF to be roughly $50 million to $75 million. The company does not have any pension obligations.

Leverage

As of Sept. 27, 2012, pro forma for the $250 million Regal issuance in January, gross debt totaled $2.25 billion and was made up of:

Fitch calculates Regal's pro forma consolidated lease adjusted gross leverage at5.1x and unadjusted gross leverage at 4.6x. While pro forma unadjusted gross leverage is currently outside of Fitch's longer term parameters, Fitch forecastsleverage to be below 4.5x at year-end 2012. There is tolerance in the current rating for leverage to go above 4.5x for a short period of time due to fluctuations in the box office.